Two decision-making problems are faced by a company which produces a range of products and absorbs production overhead using a rate of 200% on direct wages. This rate was calculated from the following budgeted figures:

There is a possibility of supplying a special order for 2000 units of product X at £16 each.
If the order were accepted the normal budgeted sales would not be affected and the company has the necessary capacity to produce the additional units.
Problem 2 The cost of making component Q, which forms part of product Y, is stated below:

Component Q could be bought from an outside supplier for £20. You are required, assuming that fixed production costs will not change, to:

(a) State whether the company should:
(i) accept the special order in problem 1;

(ii) continue making component Q or buy it from outside in Problem 2;
(Both your statements must be supported by details of cost.)

(b) Comment on the principle you have followed in your cost analysis to arrive at your answers to the two problems.Appendix

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Variable production costs Fixed production costs Direct labour costs () 64.000 96 000 80000 Problem 1 The normal selling price of product X is 22 and production cost for one unit is: () Raw materials 8 Direct labour 4 Production overhead 8 20